Controlling Your Cash Flow by Monitoring Receivables and Inventory

For many businesses, monitoring customer accounts receivables and collecting them on a timely basis is the key element of controlling cash flow, along with monitoring inventory.

Credit Policies

It all starts with sound credit-granting policies, which ensure that you extend credit only to customers who are likely to pay you on a timely basis. Once you make the sale, issue your invoice promptly. You can make it easier for customers to pay you quickly by accepting credit card payments and bank transfers, in addition to checks.

The kind of credit policies you have will vary depending upon the nature and size of your business. Many B-to-C (business-to-consumer) businesses do not extend credit. Sales are by cash or debit/credit card only. This clearly simplifies the collection process, which should only deal with isolated problems, such as a disputed credit card chargeback.

Most B-to-B (business-to-business) businesses extend credit to at least some customers. If there are only a handful of relatively large customers, it can be easy to monitor them manually. If you grant credit to many smallish customers, you'll likely benefit from some formal credit-and-collection policy and some automated accounts-receivable follow-up procedures.

Another tip is to make it easy for customers to know their account balances. Many businesses issue monthly customer statements that show the status of the customer's account, including outstanding unpaid invoices and recent payments received. In the event a customer doesn't receive an invoice, its presence on a statement can prompt the buyer to follow up and request a replacement invoice. But don't count on it. It's the seller's job to follow up on unpaid invoices.

Collections

At some point, you'll need to decide what collection procedures you need to implement. If you offer credit terms of 30 days, perhaps you issue a polite reminder at the 30-day mark, reminding customers of their responsibility to pay. If the payment is still past due after 60 days, you may escalate this to a telephone call to the customer contact. Make certain you note the results of the conversation, such as a promised payment date. It may come in handy should future follow-up be necessary. Additional escalation that kicks in at 90 days past due may include a stiffly worded letter, which may hint at punitive measures, such as a cutoff of future supplies of products or services from your business. After 120 days, your customer communication may threaten legal action to recover the debt.

While it sounds very cut and dried, credit collection is more of an art than a science. You'll need to tailor your policy to conform with generally accepted practices in your industry and your customers' expectations. If your current collection policy is rather loose and informal with no follow-up until six months after the sale, customers may rankle at receiving your newly instituted nastygram after 30 days. You don't want to annoy and possibly lose good customers who have inadvertently mislaid your invoice. On the other hand, some customers, probably ones you wouldn't mind losing, won't react until they see a written demand on a lawyer's letterhead.

Some businesses use both a carrot and a stick approach to encourage prompt payments. For example, they may offer credit terms such as a 2 percent deduction if the bill is paid in 10 days. The full amount would be due in 30 days, and if a payment is late a 1.5% interest charge would be tacked on. As for getting the customer to pay the interest charge, that's another matter.

Inventory Management

If you sell products, you probably have inventory: goods you stock in anticipation of a sale to customers. Good inventory management is also an important part of managing cash flow. You need to have a sufficient quantity and variety of goods in stock so you can meet customer demands on a timely basis.

On the other hand, you don't want to invest too much in goods that don't sell well or are at risk of becoming obsolete by newer models. This is particularly important in technology, where product costs typically decrease over time. Keeping a lean inventory with a sufficient, but not excessive, amount of goods in stock makes good financial sense in most cases.